In the midst of a global market
lull, many companies are sitting on their hands, argues Mark Lackey of CHF
Investor Relations. That's why he's scoping out smart management that's
keeping busy and making great progress—whether or not the markets are
quick to notice. Learn who's getting a running start in the uranium, oil and
natural gas spaces in this Energy Report interview.
The Energy
Report: It's been a busy five months since
your last interview in
August. What's your macro view on energy markets?
Mark
Lackey: The problems in Europe were somewhat
worse than most people anticipated regarding Greece and long-term bond rates
in Portugal and Spain. Slower world economic growth wasn't a disaster, but it
was enough to knock the price of oil back down under $90 per barrel ($90/bbl). Natural gas had been climbing closer to
$3.70–3.80/thousand cubic feet (Mcf), then
retreated as well. And, of course, uranium got all the way down to $41.25 per
pound ($41.25/lb). Part of the reason for that was
that only two out of 56 reactors in Japan were actually operating, but I'm
still bullish on uranium. The oil weakness experienced wasn't terrible, but
oil certainly went a little lower than I anticipated. Now that it's back in
that $88–89/bbl range, I'm anticipating
somewhat stronger prices next year for oil, as well as for natural gas and
uranium.
TER: Are you
still expecting West Texas Intermediate (WTI) to average between $100 and
$105/bbl next year, or has the supply/demand
picture changed?
ML: I've
lowered my expectation to more like $95–105, partly because the shale
oil supply has been a little bit better than I expected with more Bakken production on-line. On the other hand, China,
India, Indonesia, Japan and Brazil have all announced significant
infrastructure spending programs for 2013, which will certainly increase the
demand for energy.
TER: You talk
with many people in the analyst community. What's the current mood and
outlook there?
ML: There's a
bit of a divergence. People on the street who agree with me believe that
world growth will be fairly decent and that the five countries with the big
infrastructure spending will, in fact, move the world forward. There are some
who believe that both Europe and the U.S. will do better, and they're seeing
oil up in the $110–115/bbl range. Then,
there's a smaller group looking at an $85–90/bbl
range because they think the U.S. economy will stagnate and the situation in
Europe will continue to deteriorate. I would say that more analysts agree
with where I am, but there's more divergence in opinions out there than I
have seen in the last few years.
TER: Natural
gas prices have staged a strong comeback from last spring and now the main
concern in the North American markets relates to winter weather usage. Any
thoughts on that?
ML: Last
spring, natural gas hit close to a 10-year low, under $2/Mcf.
It bounced off of that to $3.90/Mcf largely due to increased
industrial demand and gas substitution for coal in the electricity market.
It's since retracted a bit of that. In the very short run, if you're looking
solely at the winter, a cold winter could move the price higher.
Looking at
fundamentals over the next year, I expect a better year for both the auto and
chemical sectors. On the supply side, drilling activity for gas was down in
November to a 16-year low in the U.S. but partially offset by horizontal
drilling advancements. On balance I expect we're going to see somewhat less
gas than some people are anticipating, and I expect it to get back up to $4/Mcf by the end of 2013.
TER: Can you
update us on some of the oil and gas plays you discussed in your last
interview?
ML: We had
mentioned Greenfields Petroleum Corp. (GNF:TSX.V), which
operates in Azerbaijan. This is not wildcat drilling. Greenfields has been
very successful reworking old wells and fields and finding oil and gas in
established areas with past production. We see its production going up
significantly this year. Being close to Europe, it gets a much higher price
for natural gas as well—anywhere from $5–9/Mcf
and also $15–20/bbl more for oil because it's
based on the Brent price, not the WTI price. Azerbaijan has had a lot of
expertise in drilling and a good labor force going back to the Soviet Union
days. It's a very pro-oil and gas jurisdiction and clearly one of the best
areas for that business.
TER: How's the
stock done since we last talked?
ML: It's
thinly traded and has gone down some, even though it beat expectations. With
oil prices coming down somewhat, people were selling small- and mid-cap oil
and gas stocks in the last three to six months of 2012. But I would suggest
that people should now be looking at companies like this because of the lower
entry point and better cash flow numbers in 2013.
TER: What
about Primeline Energy Holdings Inc. (PEH:TSX.V)?
ML: Primeline Energy will have operations in the South China
Sea and its partner is CNOOC Ltd.
(CEO:NYSE), one of
the largest oil and gas companies in the world. Production is expected late
in 2013 and it has some significant upside in terms of cash flow and
earnings, particularly into 2014. That's when one analyst has forecast
earnings of $0.24 and cash flow of $0.28 per share, which I agree with. An
important point to remember about why it can see such good earnings is that
it gets $15–16/Mcf for selling gas into
China, or approximately four to five times what natural gas gets here.
TER: That's
definitely one to keep an eye on. You also talked about a company in the
services business.
ML: Right.
That's Bri-Chem Corp. (BRY:TSX), which
announced the takeover of Kemik Inc., a chemical
blending and packaging niche company that will add to Bri-Chem's
cash flow and earnings. Bri-Chem has been very
strong in the drilling fluids, cementing and steel pipe business sector,
supplying the oil and natural gas service area. Now it will have even better
earnings and cash flow in the next two years if U.S. gas drilling activity
starts to turn up this year. And last week Bri-Chem
closed another U.S. fluids wholesaler acquisition of General Supply Co. in
Oklahoma. At this stock price level it's certainly one that people should be
looking at and expecting appreciation in 2013.
TER: Do you
have any new names in the oil and gas sector that look interesting?
ML: We've
started to follow a company called Strategic
Oil & Gas Ltd. (SOG:TSX), which is
a very interesting play in the Steen River area of western Canada. It has
primarily light oil, which sells at a premium to WTI or Edmonton light. It's
done a great job of increasing production—more than doubling it in the
last year. Another recent acquisition added approximately 10–12% to its
production numbers. It's well capitalized and with such a good balance sheet,
we see it going forward in 2013 with work that can further increase its light
oil production.
TER: So,
where's that one trading these days?
ML: It's
trading around $1.20 per share. When we first looked at it three or four
months ago, it was trading at $0.70. It's been a nice winner, given the
performance of the rest of the TSX Venture market, which has gone from 2,450
in 2011 down to 1,200 at the end of 2012. Strategic Oil's big increase in
production and the fact it produces light oil has caught the attention of the
marketplace.
TER: The other
energy sector that seems to be coming back is nuclear. Prices had been pretty
weak for several months and then suddenly jumped up to over $46/lb. Did the
Japanese election have something to do with that? What's the outlook from
here?
ML: Yes, the
Japanese election was the key factor in moving the price strongly in just a
few days. Before that, people were only starting to wake up to the fact that
the end of the Megatons to Megawatts program will take about 24 million
pounds (Mlb) out of the marketplace by 2013
year-end. Clearly, the fact that the Japanese government won with a largely
pro-nuclear position was a major catalyst. They need to stimulate the economy
and will be facing potential electricity shortages if they don't begin
restarting more of their nuclear plants over the next year; mind you restarts
require new environmental assessments that the government has now said will
be done in June.
TER: So that's
expected to create enough demand to justify higher prices?
ML: That, and
there are some other factors too. There are 66 reactors under construction
worldwide as we speak. If the Japanese bring back even 20 of their 56 that
are off-line in the next year and more new reactors built come onstream in the next one to two years, then you can see
some significant demand increase for uranium. In addition to the Megatons to
Megawatts program phaseout, Cameco Corp. (CCO:TSX;
CCJ:NYSE) has deferred its Kintyre
project in Australia and BHP Billiton
Ltd. (BHP:NYSE; BHPLF:OTCPK) has
deferred expansion of Olympic Dam. Then Uranium One
Inc. (UUU:TSX) canceled
its Zarechnoye project in Kazakhstan. Higher demand
and lower supply lead us to expect significantly higher uranium prices in the
next one to three years.
TER: Have
there been any interesting developments with the uranium developers you
talked about in August?
ML: Fission Energy Corp. (FIS:TSX.V; FSSIF:OTCQX) had some very good drill results in the Athabasca Basin, at
Waterbury Lake and Patterson Lake South. This caused the
stock price to almost double in about a week and remain close to that
peak. One of its properties is very close to the Hathor
property that was ultimately acquired by Rio Tinto Plc
(RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK), so we
view Fission as a potential takeout candidate. It's going to do more drilling
to define additional resources, but it's a company that has some pretty good
potential.
TER: A lot of
companies are working the Athabasca Basin, where most of the North American
uranium development has taken place.
ML: Right.
The two other big areas are Wyoming and New Mexico, where another company we
mentioned and have followed for a number of years, Strathmore Minerals Corp. (STM:TSX; STHJF:OTCQX) has
projects. Its Gas Hills project is in Wyoming and the Roca Honda project is
in New Mexico. I've liked Strathmore over the years because, whenever
management told me they were setting certain milestones, they met them. I've
spent a number of years in the uranium business and always thought the Gas
Hills project area was one of the best in the U.S., and it's now owned by
Strathmore. I also really like its New Mexico play, and the company has
considerable depth in its property portfolio for a junior. Strathmore expects
to see production in the next three or four years; that would make it a
relatively low cost and fairly significant uranium producer in the U.S. If
I'm right about uranium prices going a lot higher in the next three years,
this stock will be trading at considerably higher than present levels.
TER: Do you
have any new companies that look interesting?
ML: Forum Uranium Corp. (FDC:TSX.V) is one
I've watched for a while. Its two main projects are in the Key Lake area of
the eastern Athabasca Basin near Cameco's Key Lake
Mill. It's also on-trend with Hathor's Roughrider
discovery and Forum has two plays in the western Athabasca. Its management
team of President, CEO and Director Richard Mazur; Vice President of
Exploration Ken Wheatley and Chief Geologist Dr. Boen
Tan are three of the best guys that I've known in the whole Athabasca area.
These guys have actually discovered over 300 Mlb of
uranium throughout their careers.
The
company also has a very interesting play in the North Thelon, in Nunavut. I
think there's some significant upside there, and it just announced some very
good drill results. Many juniors aren't doing much these days, but these guys
are out there drilling, raising money and moving their projects forward.
That's important, because if we get the uranium prices I suggest, the markets
are going to be looking at players who have been forging ahead.
TER: Does it
have money in the till to be able to do more work?
ML: It has
some money to do part of its next work program but will likely look to raise
more. The company consolidated its shares Jan. 3. This is an interesting play
also because of its partnerships with Rio Tinto and Cameco.
I used to look at about 60 small uranium explorers and now I'm down to only
about 10 that I think have a legitimate chance of doing something down the
road. Forum is definitely one of them.
TER: Any other
ones?
ML: There's Purepoint Uranium Group Inc. (PTU:TSX.V), which is
also a player in the Athabasca Basin and has done a lot of work this year. It
signed a joint venture agreement with Cameco and AREVA (AREVA:EPA) on its
Hook Lake uranium project and completed an NI 43-101-complaint technical
report there and on its Red Willow project. Purepoint
just raised some money and Chris Frostad, Purepoint's president and CEO, is continuing to move it
forward. He'll be doing a lot more drilling over the next year with some big
people behind him. Again, it's a micro-cap company, but if you're going to
buy some micro-cap companies, buy the ones with
active management, good properties, some money in the bank and good joint
venture partners. Then you at least have a good chance of success down the
road.
TER: These
didn't all start out being micro caps.
ML: No they
didn't, and that's an interesting point. I can remember when it was trading
at $1.60 back in the better uranium days. It's way
more advanced now at $0.07, which shows you what happens when you have such a
bad market environment. The market doesn't seem to differentiate, at this
point, between uranium players that have stronger odds at being successful
and those that don't. They're all in the same basket. Once we get better
uranium prices, I think investors will start to focus on which companies
actually have not been sitting on their hands.
TER: So what
does the year ahead look like for energy stock investors and where do you
feel they should be focusing their attention for maximum upside?
ML: I'm
expecting a moderate upward movement in oil prices, but certainly not a boom.
North American natural gas should move higher. Natural gas prices in Europe
and China offer some pretty exceptional opportunities for companies selling
into those markets. My three-year outlook on uranium is way above the
consensus. I actually see uranium trading this time next year at $65/lb, compared to the current spot price of $44.75/lb. Then
I see it at $80/lb at the end of 2014, and $90/lb in 2015, all based on the supply and demand factors I
mentioned earlier.
TER: That
would certainly bring life to a lot of these cheap uranium stocks. People are
going to be all over uranium again if you get a double in the price.
ML: A lot of
people may think I'm overly optimistic, but I would point out that when we
first liked uranium at $10/lb in 2001, we thought
there was some pretty good upside. I never expected it to go to $135, like it
did in 2007. But, it does show you that when the uranium market starts to
move, it usually moves fairly significantly and can create some definite
investment opportunities.
TER: So
there's something that people certainly should focus on in the next few
months to a year. We greatly appreciate your time and input today, Mark.
ML: Thank
you.
Mark Lackey,
executive vice president of CHF Investor Relations (Cavalcanti
Hume Funfer Inc.), has 30 years of experience in
the energy, mining, banking and investment research sectors. At CHF, Lackey
involves himself with business development, client positioning, staff team
coaching and education, market analysis and special projects to benefit
client companies. He has worked as chief investment strategist at Pope &
Company Ltd. and at the Bank of Canada, where he was responsible for U.S.
economic forecasting. He was a senior manager of commodities at the Bank of
Montreal. He also spent 10 years in the oil industry with Gulf Canada,
Chevron Canada and Petro Canada.
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DISCLOSURE:
1) Zig Lambo of The
Energy Report conducted this interview. He personally and/or his family
own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Energy Report: Fission Energy Corp. and Strathmore Minerals Corp.
Interviews are edited for clarity.
3) Mark Lackey: I personally and/or my family own shares of the following
companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this
interview: None. I was not paid by Streetwise Reports for participating in
this interview.
4) CHF Investor Relations: Greenfields Petroleum Corp., Primeline
Energy Holdings Inc., Bri-Chem Corp., Strathmore
Minerals Corp. and Forum Uranium Corp. are clients of CHF Investor Relations
and pay cash fees to CHF; and CHF may have stock options or own stock in
these companies.
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